REITs and Housing Finance Seminar: East Africa · PDF fileREITs and Housing Finance Seminar:...

© 2015 RebelGroup – Confidential

Background to REITs in Affordable Housing 10 May 2017

REITs and Housing Finance Seminar: East Africa

© 2016 RebelGroup South Africa – ConfidentialSlide 2

Concept Presentation

•• Defining characteristics and investor benefits of REITs in general•• Residential property as an investment asset in the context of REITs•• The experiences of developed markets with REITs in affordable housing•• Implementation of the REIT structure across Africa

Case Study Presentation

•• Experience of Watumishi Housing Company REIT (Tanzania)

Analysis Presentation

•• Lessons from the case studies•• The critical enabling conditions for REITs in Africa•• Challenges facing residential REITs in Africa•• Approaches to increasing the financial viability of affordable housing REITs in

Africa


Table of Contents

Background to Study

Defining Characteristics of a REIT

Residential REITs

REITs in Affordable Housing

REITs in Africa


Background to Study

Key challenge for policy makers: to improve housing delivery value chains in a way that broadens access to finance for housing developers.

Failure to provide investors with substantial &

accessible targets in the residential real

estate

Struggle to attract and retain significant

investment

Limited financial resources being

channelled towards Africa’s housing

developers

Limited Housing Finance Markets in Africa:


Background to Study

What is the REIT structure, and how could it be applied in the context of affordable housing?

How has the REIT structure evolved to meet Africa’s housing finance and delivery needs?

What are the challenges and opportunities facing affordable housing REITs in Africa?

Exploring innovative approaches for channelling investment into affordable housing across Africa


Table of Contents

Background to Study


Residential REITs


REITs in Africa



What is a REIT?l Owns & manages a portfolio of mortgages /

real estate propertiesl Rules and regulationsl Allows investors to invest in portfolios of

mortgages or large-scale propertiesl Shareholders earn share of the income

stream

What are the distinguishing factors?l Aggregate diverse sources of fundingl Preferential tax treatment l High rates of profit distributionl Raise finance from investors who lack

access to real estate markets

History of the REIT

• REIT structure first established in 1960 in the US.

• Aim: provide average investor with a way to participate in property market.

• US government agreed to provide preferential taxation treatment for REITs.

• Agreed that REITs would have to comply with specific regulations.

• Succeeded in changing the investment landscape in the US.


Mortgage REIT's

Operations

REIT raises equity and

debt finance

REIT buys mortgages /

MBS

REIT earns interest income

REIT pays interest

income out as dividends

The Shareholders' Perspective

Investors buy shares in the

REIT

Investment transferred

into mortgages /

MBSs

Investors receive

returns on their

investment


Mortgage REITs versus Equity REITs

Equity REITs' Operations


debt finance

REIT acquires / develops properties

REIT leases out and

manages its properties

REIT pays rental income

out as dividends



REIT

Investment transferred

into real estate assets

(Investors not involved in

portfolio management)

Investors receive

returns on their

investment



Traditional Property Development Company

Equity Real Estate Investment Trust

Few private investors or multiple investors Multiple private and institutional investors

Sells the properties that they develop Collection of rent on properties that they own for the long-term (most countries)

Pays corporate tax on net income Exempt from corporate tax (most countries); Preferential corporate tax (few countries)

Pays capital gains tax Exempt from capital gains tax (most countries)

Pays stamp duty & transactions tax Exempt from / subject to concessions on stamp duty & transaction tax (some countries)

Invests in any type of asset class Only invests in real estate (most countries)

Retains / reinvests portion of net profits Pays out majority of net income (most countries)

May or may not be listed on the stock exchange

Achieves liquidity and transparency through listing on the stock exchange (most countries)



REITs' Operations


debt finance

REIT acquires investment

portfolio

REIT manages investment

portfolio

REIT pays rental / interest income out as

dividends



REIT

Money transferred into

investment assets

(Investors not involved in

portfolio management)

Investors receive returns

on their investment

The Regulatory Framework

Debt/Equity ratio restricted

Only real estate assets; development

restricted

REIT must distribute

majority of its net income

Tax Transparency

Exempt from capital gains

tax

Distributable income is tax

deductible

Benefits to Investors

Liquidity & transparency; reduces risk

Diversification; stable source

of income

High and consistent

income


Table of Contents

Background to Study


Residential REITs


REITs in Africa


Residential REITs

REITs are classified according to the type of property that they invest in.

Traditional property types = office, retail, residential and industrial property.

Focused REITs invest exclusively in one type of property.

A residential REIT is a type of focused REIT, which invests exclusively in residential properties, and

traditionally owns and often manages these properties.

Diversified REITs’ portfolios incorporate a variety of property types, and may include residential property

together with other types of property.


Residential REITs

Residential property, as an investment asset, is associated with distinct strengths and weaknesses. According to the international literature…

•• Development potential•• Stability of income•• Capital value stability•• Lower obsolescence•• Inflation-hedging

effectiveness

Strengths

•• High costs of housing management

•• Insufficient market size•• Illiquidity•• Reputational risk•• High taxes•• Insufficient market

information

Weaknesses


United States

•• 2nd largest REIT sector

•• 15% of the equity market capitalisation

•• Doubled in number since 1980

•• Average return of 23.2% per annum

Canada

•• 3 residential REITs

•• 2 of top 10 REITs are residential

•• 500 properties with over 87,000 apartments

Japan

•• 2nd largest REIT sub-sector

•• 14% of market capitalisation.

•• 11 residential REITs; 5 J-REITs with significant residential components

Other

•• Singapore and France

•• Emerging countries: South Africa, Nigeria and Tanzania

Residential REITs

Residential REITs are proving to be an increasingly popular vehicle for investment in a number of countries…


Table of Contents

Background to Study


Residential REITs


REITs in Africa


Macro-economic level:

- transparent, well-regulated, tax-

efficient

- stimulates additional capital flows

- positively impacts the job market and

business dynamism of an economy

Microeconomic level:

- Channels professionally managed

capital into the delivery and operation of

the built environment

- Residential REITs = mechanism for

increasing quality, supply and

affordability of residential properties

REITs as a vehicle for development




Existing research has been undertaken in developed countriesl ‘Affordable housing’ = housing provided for low-income or disadvantaged householdsl Emphasis on challenges e.g. low rentals and low returnsl Newell & Lee (2014) analyse risk-adjusted performance of social housing in Netherlands

Cannot be directly compared with affordable housing in African contextl ‘Affordable housing’ = market segment affordable for the majority of the population l Not necessarily subsidized l Implications for the risk-reward profile (and thus viability) in Africa

Asset class Average annualreturn Annual risk Sharpe ratio Performance rank

Bonds 3.7% 1.12% 1.18 1Property 7.49% 5.31% 0.96 2Listed property 4.7% 4.01% 0.58 3Social housing 4.3% 4.53% 0.43 4Shares 2.1% 24.8% -0.01 5



Examples of Affordable Housing REITs in developed countries…

•• Partnership with 12 non-profit housing providers•• Mission: positively impact communities by preserving the stock of

affordable rental•• Timely access to financing•• Spectrum of investors: impact investors à economic investors

Housing Partnership Equity Trust

(US)

•• Purpose: acquire unsubsidised rental properties that need capital improvements; introduce professional management

•• Smaller rental apartment buildings with communal facilities•• Investors = pension funds, foundations and high net-worth

individuals

Responsible Residential Investment(Canada)

•• Development and provision of social housing stock via registered social landlords (RSLs) and local authorities

•• Mission: reduce the cost of housing; provide a safe and ethical fund for investors

•• Raises capital from institutional investors & the capital markets.

Houses for Homes

(UK)


Table of Contents

Background to Study


Residential REITs


REITs in Africa


REITs in Africa

CountryYear of Establishment

No. of Registered REITs

Size of Industry

Primary Sectors

Ghana 1994 1 US$12.6 millionResidential;

Commercial

Nigeria 2007 4 US$224 millionResidential;

Commercial

Tanzania 2011 1 US$40 million Residential

South Africa 2013 30 US$16.1 billionResidential;

Commercial

Kenya 2013 1 US$35.5 million Commercial

Rwanda 2013 0 n/a n/a

Morocco 2015 / 2016 1 n/a Commercial


Residential REITs in Africa


REITs in Africa

Country Management Style

Minimum Investment in Real Estate

Development Gearing Limit

Minimum Dividend Pay-out

Corporate Income Tax Exemption

Ghana Internal n/a Allowed None None No

Nigeria Internal 75% Allowed 15% 90% No

Tanzania External 50% Maximum 10% of total assets None 90% No

South Africa

Internal / external 75% Allowed 60% 75% Yes

Kenya External IREIT: 75%DREIT: 35% Allowed

IREIT: 35%DREIT: 60%

IREIT: 80%DREIT: Optional

Yes

Rwanda External 100% Not allowed 20% 90% No

Morocco External 70% n/a n/a n/a Not yet


REITs in Africa

Case studiesl Demonstrate the potential of the

REIT model in the context of residential development

l Geographically spread across Africa

l Desktop analysis and interviews

HFC REIT (Ghana)

Union Homes Hybrid REIT

(Nigeria)

WatumishiHousing

Company (Tanzania)

IndluplaceProperties

(South Africa)

Case Studies

What was the regulatory context in which the REIT emerged?

What is the profile of investors engaged in the REIT?

What conditions and drivers allow for the REIT to work?

What have been the challenges that the REIT has faced?


Concept Presentation

•• Defining characteristics and investor benefits of REITs in general•• Residential property as an investment asset in the context of REITs•• The experiences of developed markets with REITs in affordable housing•• Implementation of the REIT structure across Africa

Case Study Presentation

•• Experience of Watumishi Housing Company REIT (Tanzania)

Analysis Presentation

•• Lessons from the case studies•• The critical enabling conditions for REITs in Africa•• Challenges facing residential REITs in Africa•• Approaches to increasing the financial viability of affordable housing REITs in

Africa

Going Forward

© 2016 RebelGroup – Confidential

Advisory

Implementation

Investment

R O T T E R D A M

A N T W E R P E N

J O H A N N E S B U R G

M A N I L L A

W A S H I N G T O N

RebelGroup Advisory SA

Contact person: Nadia Kruger-Levy

2nd Floor, West Wing, 158 Jan Smuts Avenue, Rosebank, Johannesburg, South Africa, 2196T +27 010 591 1232F +27 88 011 447 0272M +27 82 770 2616Email:. [email protected]

REITs in Africa report available at:http://housingfinanceafrica.org/app/uploads/CAHF-Real-Estate-Investment-Trusts-Study-2017.02.pdf

Contact

Centre for Affordable Housing FinanceContact person: Sireena Ramparsad

2nd Floor, West Wing, 158 Jan Smuts Avenue, Rosebank, Johannesburg, South Africa, 2196T +27 (0) 11 447 9581Email:. [email protected]

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